Human Resources

The Difference Between an Employee and an Independent Contractor

Knowing whether to hire an employee or independent contractor can be a confusing process. In this video, Ivan Ivankovich, CFO of, shares his opinion about how you should hire.

Transcribed article based on the video above.

When you are a business owner and you are looking for individuals to help you grow the business, you need to make a determination to whether you are hiring an employee or an independent contractor. There are distinct differences between the two and how they are treated for tax purposes.

A lot of companies treat people as independent contractors because it’s easier. You don’t have to deal with payroll taxes, doing payroll, all that stuff. But it’s really important that you don’t just take the easy route. You need to look at what the differences between the two classifications are. As a rule of thumb there are really three questions you have to ask yourself to see if a person is an employee or an independent contractor. Are you providing them with an office or equipment? Are you controlling their schedule? Are they temporary or permanent? If the answer to any of these questions is “yes”, they are an employee and you have to treat that individual as an employee. If you provide him or her with an office, a computer, are telling them when to come in, their hours are 8-5, you are controlling their schedule and they are permanent, then they are an employee. You have to put them on payroll, treat them as payroll and pay all the payroll taxes.

A lot of times they will be independent contractors. If you need them for temporary assignment, you are having them do one task project that has a definite period of time from start to completion and they are doing a lot of the work at home then it is pretty clear they are an independent contractor. Before you make that decision if there are any gray areas because it is kind of a gray area talk to your accountant, ask them, “How should this individual be treated, are they an employee, are they an independent contractor?” You don’t want to make the wrong decision. You will be imposed two years later, three years later, you will get a letter from the IRS saying you owe taxes.

You’ll have to pay your portion of the taxes and the individual’s taxes as well, their withholding. There are stiff penalties for making the wrong decision, don’t take the easy route, think through it and consult your accountant on making the right decision between an employee and an independent contractor.

Ivan Ivanjovich is the CFO of Docstoc. You can read more of his posts here on Docstoc at the DocstocTV profile page.